Top 10 Reasons Offshoring is Bad For Business

By Geoffrey James

Updated on: June 28, 2011 / 5:17 PM
/ MoneyWatch

The business case for outsourcing abroad is simple: a lower cost of goods allows your company make higher profit margins while remaining competitive against other firms. It can also reduce taxes and help you position your firm to expand sales inside the countries where you're deployed.

On paper, that's a compelling business case. However, in the long run, offshoring to the lowest bidder may be profoundly stupid. Here's why.

REASON #1: You can lose control of your intellectual property. In the parts of the world where outsourcing is cheapest, there is often little or no respect for corporate secrets. Patents are frequently unenforceable, and many companies discover copycat processes and products popping up, soon after they've deployed there.

REASON #2: It can result in low quality, brand-damaging products. Many firms that provide outsourcing quickly cut the quality of component parts in order to increase their margins. Eventually customers who are accustomed to believing your brand promise begin to notice that your once-great products are suddenly crappy.

REASON #3: You may be supporting slave labor and child labor. Offshoring agreements typically involve a long supply chain that may very well include companies with labor practices which, if publicized in the United States, could destroy your company's reputation. Do you really want your firm associated with little kids who lose their fingers working in unsafe conditions?

REASON #4: You might create massive environmental degradation. One reason it's cheaper to manufacture abroad is that the companies there are often cutting costs by simply dumping their toxic chemicals. Someday, somebody will get stuck with the clean-up bill; it could be your firm. Not to mention all those birth defects...on the news, next to your corporate logo.

REASON #5: You may not get access to local markets. The Chinese, in particular, are famous for giving lip service to free trade, but setting up a regulatory environment that favors local firms. Many companies have deployed there hoping to see new sales, but instead seen them go to imitators (see REASON #1).

REASON #6: You may be empowering political thugs. Make no mistake about it: communist countries are run by thugs who suppress dissent, shoot protestors, lay claim to border areas that don't belong to them, and support other, worse thugs. Do you really want your brand name associated with that?

REASON #7: It makes you vulnerable to energy spikes. While outsourcing reduces labor, it also increases transportation costs. If (as is likely) the future brings sharp increases in oil prices, paying the extra transportation cost could have a disproportionate impact on your bottom line.

REASON #8: Your product might end up killing people. There have been several well-publicized examples of dangerous products entering the U.S. from abroad. The likelihood of this happening is acute when offshoring in countries where the press is not free to report corporate-caused deaths.

REASON #9: You're helping to destroy your own country. It's one thing to make patriotic noises on the 4th of July; it's quite another to help to gut the manufacturing base of your homeland. Do you really want the rest of the country to become like Detroit? Because that's where things are headed.

REASON #10: Everyone is doing it. When everybody is following the same strategy, it can't possibly create a competitive advantage for anybody. If you really want to differentiate yourself, why not figure out a better way to keep your margins high than by simply imitating your competitors?